How did health insurance get so complicated? Here are some answers

Speaker of the House Paul Ryan (R-WI) speaks about the American Health Care Act, the Republican replacement to Obamacare, at the Republican National Committee in Washington, U.S., March 8, 2017.
Reuters
With the passage of the Republicans' health care act, the House of Representatives seems to be saying that coming up with a plan to insure Americans really wasn't all that hard after all.

It just took a bit more of a subsidy - US$8 billion to be precise - for really sick people to make Congress comfortable with the alternative to the Affordable Care Act.

But from being a professor of health finance and a former insurance CEO, I know that it is really much more difficult than this to keep all the insurers competing aggressively in the market, all the providers focused on high quality and all the patients choosing wisely among their options for coverage and care.

One of the biggest underlying problems is confusion over what we are buying here and what incentives are necessary to get everyone to behave.

What are we buying anyway?

The first confusion is over the very nature of health insurance. The discussion often reveals an assumption that we are just buying a service and paying for it much as we finance a new car. So why should I pay more in financing costs than I actually get? If I want a VW, why should I pay for a BMW? I don't need maternity services or mental health, but they are part of the standard package of essential benefits that I have to buy. And this drives up my premium.

Reuters/Aly Song

But health insurance is not car financing. By its very nature, it is the strangest of products, one that I hope I will not have to use but is there when I need it. I am not buying specific services but access to potential services, the particulars of which are unknowable in advance. This ticket to ride is very valuable, but pricing it is devilishly difficult.

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To make this work, I have to share my potential need with a large group of like-minded consumers who also hope they won't have to use the ticket. But unlike the lottery, where I want to win and get all that money for the $2 ticket I bought, I am unhappy if I "win" with my health insurance and get back more than I paid when I have a serious illness. It is this confusing nature of the product that leads to bad policy and bad purchasing decisions.

Proposed patch will wear thin

The patch proposed by the AHCA is to pull out of the insurance pool more of those who are likely to need services, leaving the rest with a premium that is closer to what they actually are likely to need on a one-to-one basis.

Loosening up the requirements on pricing to let insurers charge more for people with varying conditions moves us even closer to this image. Why shouldn't the sick pay more since they use more services? The apparent hope is to come closer to the implicit assumption of health care as car financing - I get what I pay for.

Unfortunately for all of us, this is a losing proposition. There will always be more at the margin who would qualify for coverage under the high-risk pools, driving the cost of these beyond any arbitrary funding, be it $8 billion or $800 billion.

Our experience in many states in the past is that these pools are inevitably underfunded, leaving those who would qualify the butt of a cruel joke - they can't get conventional health insurance, but the cost of even the high-risk pool is excessive due to underfunding.

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This is the real concern over high-risk pools as an alternative to offering coverage to all, regardless of pre-existing conditions. While economists suggest that this excess demand is the patient's fault (the so-called "moral hazard" of excess demand when something is covered), no one chooses to have a heart condition, diabetes or a birth defect.

Payment shapes decisions and incentives

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Another problem comes from, again, the misconception of health insurance as the financing of a known product. Besides just paying for services when needed, we also want to create incentives for prevention and high quality and lowest cost settings to provide them when they are needed.

The Affordable Care Act has moved health care far down this path through value-based payment, which rewards providers for higher quality and lower total cost over the whole spectrum of care, not just for a single service.

But while providers have received the message loud and clear and reacted with major advances on quality and cost, we have far to go in creating similar incentives for the patient. This is where the "skin in the game" argument, as a way to make individuals more responsible for their own care, has some credibility.

But AHCA supporters went further. Under their replacement bill, it is OK to penalize people for being sick, even if it is not their "fault," and regardless of their wealth or income.

The new legislation's subsidies depend on age, not income, and entirely remove the cost-sharing reductions that make high-deductible plans on the Obamacare exchanges feasible for the working poor just above the poverty level.

With these changes, clearly health insurance is no longer affordable for those who were the main target of the ACA.

Admittedly, premiums for those other than the near poor are higher under the ACA, even if health care inflation in general has been largely tamed. Those who support the lower-premium, stripped-down plans of the AHCA replacement bill focus on the concerns of those who now must buy more expensive policies that cover everything they might need - but without the subsidies the poor receive.

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So if I think I can predict what I will need and want a plan that will finance this like my new car, then I probably don't need insurance at all.

And, if I do want coverage and can afford to pay for it, the replacement legislation will do just fine. Because I have the money, I can buy a BMW policy, if I choose.

However, if I am poor - or if I care about a stable insurance market - this is a jalopy with recycled tires, a torn leather seat and an engine about to blow.